Cost reduction is the most important driver for the outsourcing market. The electronics manufacturing services (EMS) model yields an average of 10 to 15 percent in savings, which drives outsourcing from OEMs to EMS providers. By outsourcing, OEMs can reduce their capital expenditure and investments on property, plant, equipment, automation systems, infrastructure—thereby converting fixed costs to variable costs.

New analysis from Frost & Sullivan’s “Analysis of the European Electronic Manufacturing Services (EMS) Provider Market” finds that the markets earned revenues of $ 45.80 billion in 2011 and estimates this to reach $ 68.19 billion in 2016.

“The outsourcing trend in industrial, medical, automotive and other sectors is set to offer more business opportunities for EMS providers in Europe,” noted Nupur Sinha, Research Analyst, Frost & Sullivan. “Cost savings is one of the key factors for medical equipment and automotive electronics OEMs favoring outsourcing.”

OEMs may outsource some or all of their lower-margin activities, ranging from procurement, PCB and box assemblies, testing and even the repair and warranty of sold products. By doing so, they can focus on the R&D of new products and the refinement of their current products; and can participate more aggressively in sales and marketing, where they can provide differentiation. OEMs can also access the advanced manufacturing, equipment, facilities and logistics capabilities set up by EMS providers without additional capital investments.

Central and Eastern Europe (CEE) is increasingly becoming a key region for the European electronics industry. Many leading multi-national OEMs and EMS companies capitalized on the cost competitiveness offered by this region to minimize operational and manufacturing costs associated with volume manufacturing of electronic assemblies.

“CEE has also started electronic manufacturing for niche markets like automotive, medical, and industrial,” added Sinha. “Within these markets, the sub-assemblies with lower profit margins are being manufactured in CEE, rather than in Western Europe, resulting, ultimately, in the expansion of the overall EMS market.”

The most profitable verticals for EMS providers like consumer electronics and telecommunication are marked by stiff competition. The European market is also witnessing greater interest in industrial and medical segments due to the higher profit margins they offer.

“EMS providers in Europe are now focused on improving their manufacturing techniques, as some segments involve the usage of complex technologies,” Sinha continued. “Furthermore, EMS providers are increasingly focusing on shorter production runs to suit client requirements.”

Yet, as European EMS providers attempt to shake off the effects of the recession, they face a potent new threat. China, India and other Asian countries with their advantages of low manufacturing cost, abundant skilled labor and sizeable domestic markets, are starting to gain a competitive edge over their European counterparts in the electronics manufacturing industry.

“China, in particular, will offer a large pool of inexpensive and skilled labor,” cautioned Sinha. “This will pose a serious threat to European EMS providers.”

This report is courtesy of Frost & Sullivan. For more details, visit http://www.smt.frost.com.